Economic downturns and the voluntary sector: what can we learn from historical evidence?

John Mohan , Karl Wilding | 01 April 2009

Executive Summary

The recent confirmation that the UK economy is now in recession has prompted speculation about the effects of an economic downturn on charitable giving and the voluntary sector with a number of commentators predicting a potential financial crisis.

The evidence cited in the current debate is thin and ahistorical. It is characterised by a lack of hard empirical data (in contrast to discussion about other sectors of the economy) and often measures of perceptions drawn from small-scale surveys.

Under pressure both from sector representative and membership / umbrella bodies, and from frontline charities in areas from advice services to mental health, policymakers are in danger of producing policy that is either badly informed by poor research or uninformed by history.

Historical evidence can offer guidance in relation to the key question of the effects of changes in the real economy on the voluntary sector.

Drawing on British and North American studies, long-run evidence seems to suggest that there is a definite recessionary impact on charities, but although financial donations dip they do recover over time.

In the long term the proportion of income given to charity by individuals remains generally constant and this was so even for the Great Depression of 1929-31 in the USA.

There is also evidence that new voluntary organisations continue to be formed even in recessionary periods and that charities have been creative in terms of developing new sources of income during periods of economic duress.

Finally, we suggest that those voluntary organisations who do request state aid should not be surprised if, as in previous periods, this is associated with demands for greater accountability, partnership and rationalisation.

Introduction

The current economic downturn is prompting speculation about the consequences for charitable giving and the voluntary sector more generally. Some commentators suggest, on the basis of small-scale surveys, that substantial numbers of voluntary organisations face a potential financial crisis. Several surveys have explored the anticipated effects of the current recession, but despite the press coverage given to them, these surveys are based on small or unrepresentative samples of the voluntary sector population- in one case, making claims about likely developments from a sample of 43 organisations, which is hardly representative of a population of c. 190,000 registered charities. Even if they were representative, such surveys report perceptions of what might happen rather than hard economic evidence as to what is happening, and they are hardly disinterested, since organisations might be expected to exaggerate adversity and penury in order to attract funding (whether from public or private sources). Similarly, surveys of donor intentions remain difficult to verify and, in the case of the more pessimistic reports, difficult to reconcile with some recent high profile fundraising initiatives. For example, although arguably atypical, the 2008 Children in Need and the 2009 Comic Relief fundraising events both broke previous records for funds raised. Given the pressure on policymakers to do (or seen to be doing) something, there is a significant risk that current policy, and therefore the allocation of scarce resources, will be based upon poor quality evidence.

Evidence from previous episodes of economic duress, where available, may provide more reliable guidance for policymakers. If one is trying to trace the effects of economic cycles then an obvious requirement is a time series of observations ideally covering at least the length of an economic cycle; a second requirement would be to ensure that the data referred to a consistent set of organisations over time, while a possible third requirement would be to look at very specific indicators such as a particular source of income - in the case of the latter, evidence suggests that different funders themselves respond differently to recessionary conditions. These conditions are not met by current British studies nor were reliable statistics on the charitable sector being captured in a comprehensive way during previous post-war British recessionary periods. However new historical research on the finances of the interwar hospitals in Britain (at a time when the bulk of acute hospital treatment was provided by voluntary hospitals, which were charitable organisations drawing income from a range of sources) along with established research on the American non-profit sector, provides the basis for a statistically more reliable evaluation to be made.

Historical evidence from the UK

In the interwar period, typically around 1,100 British voluntary hospitals reported annually on their finances and activity, while the larger hospitals (those with more than 100 beds, and who therefore supplied the bulk of inpatient treatment) provided detailed information on the various sources of income on which they drew. A database created from these sources allows selection of consistent sets of hospitals, by type and location, as well as compilation of data at constant prices for particular income sources.

What effect did economic trends have on hospital finances? First, we can look at the extent to which hospitals were able to cover their costs by examining the surpluses or deficits recorded on ordinary income in any given year. This is not perfect, because arguably hospitals had an interest in exaggerating penury when presenting their accounts, but if we make the assumption either that they all did so or that such exaggeration was randomly distributed then the trends in surpluses/deficits can be taken as an index of financial health or stress. Second, we can explore real-terms trends in particular income sources, such as legacies, donations and other forms of giving.

Looking first at London, we have a set of 72 voluntary hospitals whose income and expenditure statistics were consistently reported each year between 1921 and 1942. There is some evidence of a cyclical pattern of deficits. A serious crisis followed the First World War, as the pressure of the flu pandemic and rising prices coincided with falling receipts to place pressure on hospital finances; 55 per cent reported deficits in 1921. The proportion of institutions experiencing deficits then dropped but rose again to 50 per cent in 1930. An improvement in the early 1930s (fewer than 30% recorded deficits in 1933) was followed by a significant worsening in the late 1930s. Similar trends were experienced elsewhere in the UK, though the proportion of institutions experiencing deficits was typically smaller. Growing needs and worsening economic circumstances therefore raised demands and reduced the resources available to meet them; we can expect similar effects at the present time.

Turning to particular sources of income, 13 of the largest hospitals in London reported income and expenditure consistently between 1918 and 1942. There were five principal sources of income: voluntary gifts, legacies and special appeals, investment income, payments by patients for services received, and payments by public authorities. Voluntary gifts were the largest single item until 1934, when they were superseded by income from patients. However, income from voluntary sources appears cyclical - rising from just under £250,000 (at 1938 prices) in 1919 to £400,000 in 1927 and 1929, before falling again to just over £250,000 in 1939. As for legacies, income from these sources was largely stable throughout the 1920s and 1930s. Investment income grew steadily but unspectacularly from around £150,000 in 1918 to £200,000 in 1942. It seems fair to say that trustees were cautious and, where endowment deeds did not specify the freedom of trustees to administer investment as they saw fit, they were legally required to invest in a specified range of securities. In practice many hospitals invested in fixed-interest war bonds and exchequer bonds. This seems to have led to fairly stable returns with little or no risk to capital. There were no Icelandic banks on the scene.

In short, for the London hospitals, there was a mixed picture. During the interwar period, including the depression years, hospitals with endowments in London managed to generate a steadily growing income from their investments. Even in turbulent times, if managed carefully, investment income was stable. Voluntary income seems to have been rather more cyclical in character, while legacies exhibited little variation. London was not entirely typical, however; donations, legacies and endowments were more important to London's hospitals than in the provinces. Conversely, hospitals in the capital were slower to develop the substantial hospital contributory schemes, engaging substantial proportions of the population in small weekly subscriptions to a collective fund, that were a key feature of hospital finances elsewhere in the country. This was rectified after 1922, with the establishment of the Hospital Saving Association (H.S.A), which eventually became the largest contributory scheme.

Turning, then, to the situation outside London, for a set of 63 provincial general hospitals whose records appeared continuously from 1926-41, we can track what happened to aggregate income from charitable sources. These institutions are representative of the larger provincial hospitals and they accounted for nearly half the total income of voluntary hospitals (a distribution of resources not dissimilar to the voluntary sector today, in which a small number of large organisations command a very large share of total expenditure). At constant prices charitable income varied from £1.71 million in 1941 to £2.45 million in 1936. Some minor fluctuations in the late 1920s were followed by 8 years of steady growth from 1929 - in other words, even in challenging economic circumstances, this form of income grew. This suggests the resilience of charity - though regional variations in prosperity meant that the level of resources available to the hospitals also varied considerably and we know from studies of individual hospitals that not all shared in growth. There is also an argument that contributory schemes should not be counted as genuine charity - some evidence suggests that they were perceived by their members as constituting an insurance policy as much as a gift. If so, subscribers might have been less likely to cut back on their contributions than they would have been if they had conceived of them as gifts.

For a wider perspective on the dynamics of hospital finances, Gorsky et al established a consistent set of 458 hospitals which made returns to the Hospitals Yearbook every year between 1929 and 1942. This set contains 66% of the voluntary hospital beds in England, Wales and Scotland, and 70% of hospitals with over 100 beds. Just under 20% (84) of the hospitals represented were in London. Broadly, the proportion of institutions in deficit exhibited cyclical characteristics, peaking in 1931, coinciding with the depression, and falling until the mid-1930s before rising again until 1939, at which point more than one in three hospitals reported deficiencies on income. Of course this means that even at this time two thirds of hospitals were not experiencing such deficiencies, but it is possible that they had to cut back on services to stay within budget. As an indication of this, the wartime Hospital Surveys showed that numerous hospitals had mothballed some of their facilities in 1938, though we do not have comparable statistics for earlier years.

The existence of large numbers spending more than they received in a given year does not indicate a clear and present danger to the viability of voluntarism, unless deficits were large and occurred in the same institutions. The problem of persistent deficits was confined to a small number of hospitals, with 51 of the 458 institutions experiencing deficits in at least seven years during this 14 year period. It is probably true that it tended to be the smaller institutions, without a diverse income stream or an asset base which were most prone to experiencing these difficulties. For example The Palmer Memorial Hospital, in Jarrow, was described by Ministry of Health officials as having 'fallen on evil days' during the 1930s because it had no resources to fall back on when the town's shipyard, the principal employer, closed in 1934 and workmen's contributions - the hospital's main source of income - dried up.

The effects of annual surpluses and deficits depended in part on the asset base and the ability of hospitals to absorb them or to obtain loans secured against their assets. Consideration of this requires us to look at individual hospitals' accounts, where we find a widely varying picture. Guy's Hospital typically ran an overdraft of between £140-200,000 in the interwar years but since it had an endowment that was worth over £1 million at that time, it was well able to guarantee any credit facilities it was given. This was not the case for the Royal Northern Hospital, also in London, which dealt with increasing demands for its services (it was the principal hospital in an area of London where the population was growing steadily) by increasing its overdraft substantially, to the point where by the late 1930s the overdraft was roughly equivalent to the hospital's annual revenue. In the current environment in 2009, loan finance may of course prove a more elusive solution to cashflow problems.

In short, there are no easy or universal generalisations about the impacts of adverse interwar economic circumstances on hospital finances. The situation of individual hospitals varied considerably, depending on location, the balance of income sources on which they drew, their asset base, and their policy towards investment of such assets as they had. In the present day, the impact of the recession will depend as much upon the internal management capacity and decision-making, and on their existing resources, as on the external environment.

Charitable giving: lessons from America?

American research on the non-profit sector is better developed than in the UK and in general better statistics are available for a longer time period. In particular, we know much more about charitable giving for the USA but there are competing interpretations of the trends.

The effects of the great depression (1929-31) and its aftermath attracted attention and statistics were compiled initially in Yearbooks of Philanthropy published by John Pryce Jones from 1940 onwards. Jones relied on newspaper reports of larger gifts nationwide so they are probably a reasonable summary of giving by the wealthy, but they will under-represent giving by low-income individuals and households. Such a source might also underreport if some donors were simultaneously making large donations and making people redundant (and were therefore reluctant to have their philanthropic efforts publicised), and this might certainly be the case for corporate donations in the present day. In contrast the reports by F. Emerson Andrews covering the period from 1929-1949 were based on Inland Revenue Service (IRS) data, as well as other government reports, so these are likely to provide a better estimate of overall giving.

Jones reported a substantial drop in gifts in the depression years; charitable giving declined from $832 million in 1928 to $479 million in 1933. When adjusted for inflation this was proportionate to the substantial drop in the stock market, which clearly had a major impact on the discretionary wealth of the upper strata of society. This would also be expected to have an effect on the asset base of foundations. Historical of the United States suggests that for 100 large foundations and community trusts, grant expenditures fell from $83 million in 1928 to $34 million in 1934. Income on the endowments of foundations also fell by over 30% between 1930 and 1934. The comparison is interesting as it suggests the foundations were trying to shore up their own position by preserving their endowment, possibly to ensure they were able to 'exist for perpetuity', rather than smoothing out the impact of recession on clients by maintaining their grantmaking; recent reports seem to suggest that some American foundations are continuing to make grants despite a decline in the value of their endowments.

The Andrews report covered a wider range of donors and donations, so the reductions are by no means as dramatic. On Andrews' figures, giving dropped by 22 per cent from 1929 to 1933. However, overall giving began to recover after 1933 and had more than doubled by 1941, whereas giving by the wealthy as reported by Jones continued to decline until the early 1940s. If this was to happen again, and there was a decline in income followed by a swift upturn, it would be important to ensure that organisations did not shed so much capacity that they would be unable to deal with an upturn in income. Consistent with the figures presented by Andrews, giving to Community Chest and United Way fund campaigns peaked at $101 million in 1931 and then fell to $69 million by 1934, though the statistical source includes organisations based in Canada. Combined with the figures reported by Jones, this suggests a redirection of resources towards more local, community-based organisations. A less optimistic version of events suggests that charitable contributions claimed as deductions from tax returns dropped from $459 million in 1928 to $185 million in 1933, though by 1940 they had surpassed their 1928 levels. If the former interpretation is valid, it presents an interesting finding for current policy development, which is based upon an orthodoxy that the largest fundraising charities are better able to maintain levels of donated income.

These figures suggest a strong association with the performance of the economy as a whole and the stock market in particular, and the focus on absolute amounts is not encouraging. An alternative perspective, again drawing on tax return data to the US Treasury, showed that there was actually very little variation in the proportion of income given to charity over time. From 1922 to 1938 1.5% of gross income was donated to charity; the average for 1922 to 1929 was 1.81% while from 1930 to 1938 the average was 1.87%. The message here is that Americans gave to charity as much or more of what they actually had, but as unemployment levels rose during the depression years, fewer people were in a position to give anything. The implication is that unemployment in general is the most important factor to watch. One interpretation of these figures is that those who were reporting income, across all income strata, were becoming more generous in response to evidence of rising need. Another possibility is that the Depression had an uneven impact and that those left in the IRS returns happened to be those who gave at above-average levels. We cannot determine which is true, but this is why it has been suggested that giving actually rose in the Depression. What is also notable is the consistency of this ratio, suggesting that giving marches in step with the economy, and will therefore recover in due course.

Turning to more recent periods, characterised by smaller-scale economic downturns, there have been attempts to assess the impact of recession and economic slowdown on charitable giving. According to the US National Bureau of Economic Research there have been six recessionary periods lasting between eight and 16 months in the past 40 years. The Centre on Philanthropy at Indiana University has demonstrated that even in years with at least one month of recession, the picture was ambiguous. Drawing on the Giving USA statistics, adjusted for inflation, they found that in the worst year for giving, which was 1974, donations dropped by a total of 5.4%, whereas in the period 1980 to 1982, incorporating two recessions, total giving continued to rise. Disaggregation by sector yields interesting results - giving to educational causes declined most steeply (on average by 1.9% in recessions since 1967), whereas donations to human services and organisations providing broad public and social benefits appeared to experience growth in recessions. These organisations saw a slower rate of growth, but not a decline.

In short, there is actually a degree of consistency in the level of philanthropic support from the American people, and strong associations between the performance of the economy, the stock market and the level of legacies. This is of no comfort to individual organisations but it does suggest that the underlying picture is one of long-term stability even if there is short-term turbulence.

Beware of crying wolf

There is no point in pretending that the economic downturn will not have negative impacts on the sector, but there is nevertheless some reassurance in the historical record. The American evidence demonstrates fairly conclusively that recessions are by no means fatal to charitable activity. The British evidence shows that assuming a blanket picture of gloom just won't do - with many hospitals continuing to expand resources, capacity and activity steadily throughout the inter-war years. Clearly, policymakers need to move beyond the limited utility of thinking about the voluntary sector and instead target actions towards particular causes or types of organisations that suffer most in periods of economic duress. The sources of such duress - rising levels of need, dependency upon a small number of income streams or donors, poor capitalisation and reserve levels - are not evenly distributed.

Moreover, stagnating or declining income sources can have some positive effects. Even before the economic upheavals of the inter-war years, many British hospitals were diversifying their income sources and relied to a much lower extent on traditional philanthropy than hitherto. Recessions can have beneficial effects on certain aspects of charitable activity; downturns have prompted strong responses, such as the substantial public response to appeals to assist the depressed areas of the UK in the 1930s, or the self-help initiatives founded in many communities in the course of the coal dispute of 1984 - 5. Long-run studies of the number of charities being founded, drawing on data provided by the Charity Commission, indicate steady upward growth, even during recessionary periods, though what we don't yet know is whether those periods were also associated with some rationalisation, possibly leading to improvements in efficiency.

To what extent are calls from the sector for greater state support likely to be heeded? In the 1930s, the vagaries of philanthropic income regularly prompted warnings of potential catastrophe, but these were received with scepticism. Ministry of Health officials were well aware that 'an overdraft is an asset for the purposes of collecting charitable contributions'; they were advised confidentially that problems were limited to a small number of hospitals where the difficulties were the result of managerial failings. It was also felt that hospitals were engaging in 'a certain amount of bluffing' when protesting their imminent bankruptcy. In the late 1930s, therefore, the assumption was that voluntarism was not in terminal decline, but simply needed to get its house in order, and officials were highly sceptical about the desirability of making public money available. Of course, this was an era when public sector grants to voluntary bodies were in their infancy. The emphasis, instead, was on cooperation and partnership within the hospital system. Although some grants were made available for new capital investment in the depressed regions of the North East, Cumbria, Scotland and Wales, these were tied to reform, in the sense that they were conditional on cooperation and the avoidance of duplication.

This evidence suggests that a recession will have very diverse impacts depending on the position of individual organisations, and that it will create challenges other than increasing demand for services and pressure on revenue streams. A structured programme of support for the sector, to ensure that the sector is well placed to respond to the challenges of the downturn, therefore makes sense. This is so not least because, given the increasingly important role played by the sector in the delivery of public services, it is also arguable that we have created a situation where they cannot be allowed to fail. The challenge of such a programme of support will be whether the terms on which it is offered will be acceptable.

Acknowledgements

John Mohan would like to acknowledge research support from the ESRC-OTS Third Sector Research Centre and the Centre for Charitable Giving and Philanthropy, and from the Leverhulme Trust for research on the interwar hospitals, in collaboration with Martin Gorsky. We would also like to thank Beth Breeze and Bernard Harris for a number of helpful comments on an earlier draft.

References

A note on sources

The database on interwar hospital provision to which reference is made here was developed by John Mohan and Martin Gorsky with funding from the Leverhulme Trust. A public-use version of it will shortly be made available, supported by the Wellcome Trust's Research Resources in Medical History program. Data on trends in the growth of charities draw on work by Peter Backus (Centre for Charitable Giving and Philanthropy; University of Southampton) to extract foundation dates from information given in the Charity Commission register (data from which was supplied by Guidestar Data Services).

About the author

John Mohan is Professor of Social Policy, University of Southampton, Deputy Director of the recently-established Third Sector Research Centre, a collaborative venture between Southampton, Birmingham, Kent and Middlesex Universities, funded by ESRC, the Office of the Third Sector, and the Barrow Cadbury Trust (see the TSRC website), and Director of the Centre for Charitable Giving and Philanthropy's strand of work on charity and social redistribution (in collaboration with colleagues at Kent University). He is co-author of Mutualism and Health Care (with Martin Gorsky, 2006), and author of Planning, Markets and Hospitals (Routledge, 2002), as well as of numerous historical and contemporary studies of voluntarism and volunteering. J.F.Mohan@soton.ac.uk.

Karl Wilding is Head of Research at the National Council for Voluntary Organisations. His research interests include mapping the changing third sector economy and the relationship between new technologies and voluntary action. He is trustee of the Association for Research in the Voluntary and Community Sector and an Honorary Senior Visiting Fellow at the Centre for Charity Effectiveness, Cass Business School in London. karl.wilding@ncvo-vol.org.uk.

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